Rupiah Rally Reversed as Jokowi Setback Signals Woes: Currencies

Joko Widowo, Governor Of Jakarta And Presidential Candidate. Widodo, who has reduce bureaucracy cut red tape and backed major infrastructure projects, is favored by the market. Photographer: Bay Ismoyo/AFP/Getty Images

June 9 (Bloomberg) -- The fading political fortunes of
Indonesia’s leading pro-reform presidential candidate have
turned the rupiah from a world-beater into a laggard on
speculation the country will struggle to achieve lasting
improvements to its trade balance.

After soaring 7.1 percent in the first quarter, the
currency has slumped 3.6 percent against the dollar, the worst
performance among 31 major peers. While surveys of strategists
point to gains by year-end, bears are emerging, with banks from
ABN Amro Bank NV to Morgan Stanley predicting a decline to
levels beyond 12,000 per dollar, from 11,779 today.

The rupiah is turning sour after April elections resulted
in a fragmented parliament and rivals of Joko Widodo, the
business-friendly Jakarta governor better known as Jokowi,
joined forces before July’s presidential vote. That’s adding to
concern after Bank Indonesia warned last week that the deficit
in the nation’s broadest measure of trade -- its current account
-- could double this quarter.

“The presidential election is looking like a closer
contest than before,” while “the trade deficit could remain an
issue,” Khoon Goh, a currency strategist at Australia & New
Zealand Banking Group Ltd. in Singapore, said in a June 4
interview. “Jokowi is seen as a business-friendly reformer, but
there’s a chance he fails to secure a sweeping win.”

Predicting Declines

Goh sees the rupiah depreciating to 12,000 per dollar by
Dec. 31. HSBC Holdings Plc affirmed on May 29 its forecast for a
decline to 12,250, while ABN Amro last month predicted a slide
to 12,500.

Morgan Stanley, which in 2013 coined the term “fragile
five” to describe emerging-market currencies, including the
rupiah, that are vulnerable because of their trade deficits,
estimated a year-end level of 12,200.

While the rupiah has risen for the past three days, it’s
still only about 1 percent stronger than its four-month low of
11,898 reached on June 5, prices from local banks show. The
currency slumped 21 percent last year, before reaching a five-year low of 12,285 on Jan. 7.

It was a different story in the first quarter, when the
deficit in Indonesia’s current account narrowed to 2.1 percent
of gross domestic product, compared with a record 4.4 percent in
the second quarter of 2013.

Lost Progress

An official report on June 2 suggested those improvements
may not last. The Central Bureau Statistics in Jakarta said
imports exceeded exports by $1.96 billion in April, compared
with the median prediction for a $178 million surplus in a
Bloomberg survey of 20 economists.

“The concern is that with the large trade deficit, the
current-account deficit will be wider than previously
expected,” Nurul Eti Nurbaeti, the head of treasury research at
PT Bank Negara Indonesia in Jakarta, said in a June 3 phone
interview.

Widodo, who as governor of Jakarta has cut red tape and
backed major infrastructure projects, is favored by the market.
The rupiah surged to a five-month high three days after the
Indonesian Democratic Party of Struggle announced him as its
presidential candidate on March 14. He’s also leading the other
leadership contender, former army general Prabowo Subianto, in
the polls, though by a narrowing margin.

Investors ‘Cautious’

“Political uncertainty and rupiah volatility will likely
keep investors cautious on Indonesia,” David Sumual, the chief
economist at PT Bank Central Asia in Jakarta, said by phone on
June 3. He said policy makers favor a weaker currency to make
exports more competitive.

Investors can also benefit from the rupiah’s declines,
which are more to do with the forthcoming Muslim month of
fasting, starting in late-June, than economic fundamentals,
according to Tim Condon of ING Groep NV.

“This current bout of weakness will probably prove to be a
buying opportunity,” Condon, the bank’s head of Asia research
in Singapore, said in a June 4 phone interview. “The trade data
was bad largely because of seasonal buying ahead of the Ramadan
festive season, which doesn’t warrant such a marked depreciation
in the currency.”

ING predicts the rupiah will rally to 10,800 per dollar by
the end of the year. The median of 21 strategist estimates in a
Bloomberg survey is for a gain to 11,639 by Dec. 31, though
that’s down from a forecast of 11,450 on April 29.

Rate Boost

Investors have other reasons to be optimistic about the
rupiah. Bank Indonesia lifted its main interest rate by 1.75
percentage points to 7.5 percent since May 2013, luring foreign
investors who have pumped 70.83 trillion rupiah ($6 billion)
into local-currency government bonds this year.

For a growing number of foreign-exchange strategists, the
rate increases are masking a slowing economy.

GDP expanded 5.2 percent in the first quarter from a year
earlier, the slowest pace since 2009 and down from 5.7 percent
growth in the previous period. Bank Indonesia cut its full-year
forecast last month to 5.1 percent to 5.5 percent, from as high
as 5.9 percent.

The current-account and budget shortfalls, together with
fuel and electricity subsidies, are also cause for concern, said
Yii Hui Wong, a Singapore-based strategist at BNP Paribas SA.
Those subsidies will account for about 15 percent of government
spending this year.

“The rupiah’s outlook is shaky due to the uncertainty from
the upcoming election and as Indonesia still faces the issues of
having to deal with fuel subsidies and the country’s twin
deficits,” Wong said in a June 5 phone interview. “Offshore
investors are more cautious now.”